Diamond Report #179

Market Overview

As we move into the busy Spring season after a strong Diwali and Chinese New Year, the activity in the rare diamond market has been very positive on the back end of peak production and strong buying at the rough and jewelry level. The spring auction season is expected to show very promising results as the major auction houses begin to put their catalogues together.

In this issue we will discuss the activity at the Vicenzo show in Italy, the strong sales of rough diamonds as well as very buoyant sales at the jewelry level and most importantly what many refer to as the overvaluation of global stock markets around the world and why it is so important to hedge your portfolio using assets like rare colored diamonds.

Vicenzo Show – Italy

Attendance was strong at the January edition of VicenzaOro, spurring confidence that Italy’s gold-jewelry exports would improve in 2018. Rising production and consumption of gold jewelry signaled a favorable outlook for the sector, said Lorenzo Cagnoni, president of organizer Italian Exhibition Group (IEG), in his opening address on January 19.

“VicenzaOro January opens in a highly positive context, both in terms of confirmations coming in of a recovery in demand for gold, and of the significant results that our group is proving to obtain at this and at the other 60 shows in our company’s portfolio,” he said.

The VicenzaOro show, which ran until January 24, is a gateway for exports of Italian gold jewelry, manufactured in centers such as Vicenza and Arezzo, to leading markets, including the United Arab Emirates and the US. The show, which kicks off the international trade-fair season, is a barometer of jewelry-design trends for the coming year.

Halls were packed as jewelry retailers from around the world came to stock the latest designs in their stores. VicenzaOro January hosted more than 4,500 exhibitors, 35% of which were from outside Italy, and an estimated more than 96,000 visitors from 130 countries. A highlight of the event was the awarding of best designer to Massimiliano Bonoli, who works for jeweler Mattia Cielo, in the Andrea Palladio International Jewellery Awards staged on January 19.

Trends emerging at the show included the influence of gender neutrality, preferences for ethically sourced jewelry, growing demand for men’s jewelry, and a profusion of color across a range of mixed-and-matched materials.

Indian Gems & Jewelry Market

India’s gem and jewelry exports will grow by a double-digit percentage this year, Pramod Agrawal, the newly elected chairman of the Gem & Jewellery Export Promotion Council (GJEPC), predicted this week.

The high quality of Indian manufacturing and a recovery in US and European markets will drive the growth, Agrawal explained at the Signature India International Jewellery Show (IIJS) in Mumbai. The GJEPC is planning to step up promotion in markets that lagged in recent years, including in Eastern Europe, Africa and Latin America, he added.

Turning to the local diamond trade, Agrawal said the GJEPC was lobbying the government to retract its decision to raise the import duty on polished diamonds from 2.5% to 5%. The new duty creates an uneven playing field that will hamper the nation’s competitiveness with Belgium, Dubai and Israel, he has argued. The Signature show, which ran from February 9 to 12, signaled a positive mood in the local industry, with a record pre-registered attendance of 11,000 visitors.

Jewelry and Watch Sales

Jewelry-and-watch revenue rose to $4.73 billion (EUR 3.81 billion), driven by a strong performance at its Bulgari brand and the launch of a TAG Heuer customizable smart watch line. Comparable-store sales increased 12%, while profit for the division grew 12% to $636.2 million (EUR 512 million). The improvement was particularly strong in Asia, the US and Europe, LVMH noted. Group revenue increased 13% to a record $52.94 billion (EUR 42.6 billion), with double-digit growth across all departments except wines and spirits. Net profit jumped 29%.

Rough Diamond Sales

Rough-diamond demand was strong at De Beers’ January sight, as manufacturers plan to increase their production in anticipation of post-holiday orders from retailers. The mining company reported proceeds of $665 million in its first sales cycle of the year, which included last week’s sight in Gaborone, Botswana, as well as its rough auctions.

“Following positive early signs for diamond-jewelry sales over the holiday season in the US, the need for the industry to restock led to increasing demand for our rough diamonds in the first sales cycle of 2018,” De Beers CEO Bruce Cleaver said Tuesday. “This seasonal restocking demand does usually see a larger share of annual purchases being planned into the first sales cycle of the year by our customers, resulting in an encouraging sales performance.”

“Initial results relating to Christmas sales are generally positive, further to buoyant sales in the US and continued strong growth in the Chinese and Hong Kong markets,” the South Africa-focused producer said in an update this week. “Petra expects market conditions to remain stable in [January to June].”

Premiums — the markup at which sightholders resell De Beers goods to other dealers on the secondary market — rose to 6.3% from 2.8% in January, reflecting the strong demand, according to rough broker Bluedax. Manufacturing in India has increased since Diwali in November due to demand for polished, Bluedax’s Dudu Harari said in a blog post. In addition, the seven-week gap since the December sight led to shortages in certain categories.

“There was a brisk trade in rough, and a lot of old goods sold,” Harari noted. “It has been a good month for rough traders, who had a rough ride last year. Sales of jewelry and other luxury goods grew in both Hong Kong and China last year amid improved consumer sentiment. In Hong Kong, full-year sales of jewelry, watches, clocks and valuable gifts rose 5%, reaching $9.6 billion (HKD 75.05 billion), the municipality’s Census and Statistics Department reported last week.

In mainland China, meanwhile, gold, silver and jewelry sales grew 6% to $47.12 billion (CNY 297 billion) during the same period, according to the National Bureau of Statistics. The increases in jewelry sales in both Hong Kong and China mirrored a positive trend in the general retail sector, which continued in December, the respective reports showed. Solid retail growth in Hong Kong during December reflects rising consumer sentiment, a government spokesperson said. Favorable employment and income conditions, as well as the return of inbound tourism, contributed to this improvement. “The near-term outlook for the retail trade stays positive,” the spokesperson added.

The region is currently in its busiest retail season ahead of the Chinese New Year on February 16. De Beers expects its production to hit a high point in 2018 as a number of its mines approach the end of their life span, CEO Bruce Cleaver told Rapaport News.

The decline is due to its Venetia mine transitioning from an open-pit to an underground operation, while its Victor mine in Canada is due to close in the first half of 2019. Some of its operations in Namibia will shut in the coming years, with De Beers also recently putting its South Africa-located Voorspoed mine up for sale, Cleaver explained. “Global production is peaking, and will remain at these levels without a significant increase for some time,” he added.

De Beers maintained a positive outlook for this year off the back of stronger consumer demand for diamond jewelry in US and China in 2017. Demand has picked up for certain polished categories that had struggled of late, including VVS-clarity stones, while the miner’s retail unit, De Beers Diamond Jewellers, saw a strong December sales period, Cleaver noted.

“Improving global macroeconomic conditions remain supportive of consumer demand growth for polished diamonds in 2018,” the company said in its 2017 earnings report Thursday.

Rio Tinto – Rough Diamond Sales Grow

Rio Tinto’s diamond revenue rose 15% to $706 million in 2017, as global rough demand increased and Indian manufacturers replenished stock following demonetization.

Profit in the diamond unit almost doubled over the previous year, climbing 96% to $92 million. Earnings before interest, tax, depreciation and amortization (EBITDA) grew 20% to $287 million.

“Rough diamond demand was solid in 2017,” the company said Wednesday. “Factories in India increased manufacturing capacity as the market normalized following Indian banknote reform in 2016, and the outlook in key emerging markets improved. This resulted in sustained restocking activity throughout the pipeline for most of the year.”

Steve Keen, Economist – Stock Market Valuations

Everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question. The real poser is “why did it take so long for this crash to happen?”

The crash itself was significant—Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index—and so according to conventional economics, it should almost never happen.

Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much.

Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different. It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been.

More To Come?

There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).

The S&P500 fell more than 11 percent that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50 percent from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years.

After the 2000 crash, standard market dynamics led to stocks falling by 50 percent over the following two years, until the rise of the Subprime Bubble pushed them up about 25 percent (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50 percent, from 28 times earnings to 14 times.

Safe Havens

That valuation level, before central banks (staffed and run by people with PhDs in mainstream economics) decided that they knew how to manage capitalism, is where the market really should be. It implies a dividend yield of about six percent in real terms, which is about twice what you used to get on a safe asset like government bonds—which are safe, not because the governments and the politicians and the bureaucrats that run them are saints, but because a government issuing bonds in its own currency can always pay whatever interest level it promises. There’s no risk that it can’t pay, and it can’t go bankrupt, whereas a company might not pay dividends, and it can go bankrupt.

Now shares are trading at a valuation that implies a three percent return, as if they’re as safe as government bonds issued by a government which owns the bank that pays interest on those bonds. That’s nonsense.

And it’s a nonsense for which, ironically, central banks are responsible. The smooth rise in stock market prices which led to the levels that preceded Monday’s crash began when central banks decided to rescue the economy by “Quantitative Easing (QE).” They promised to do “whatever it takes” to drive shares up from the entirely reasonable values they reached in late 2009, and did so by buying huge amounts of government bonds back from private banks and other financial institutions (pension funds, insurance companies, etc.). In the USA’s case, this amounted to $1 trillion per year—equal to about seven percent of America’s annual output of goods and services (GDP or “gross domestic product”). The Bank of England brought about £200 billion worth, which was an even larger percentage of GDP.

With central banks buying that volume of bonds, private financial institutions found themselves awash with money, and spent it buying other assets to get yields—which meant that QE drove up share prices as banks, pension funds and the like bought them with money created by QE.

Blind Oversight

So this is the first central bank-created stock market bubble in history, and central banks have just had the first stock market crash where the blame is entirely theirs.

Were this a standard, private hysteria and leverage driven bubble, we could well be facing a further 50 percent fall in the market—like what happened after the DotCom crash. This would bring shares back to the long-term average of 17 times earnings.

Instead, what I believe will happen is that central banks, having recently announced that they intend to end QE, will restart it and try to drive shares back to what think are “normal” levels, but which are at least twice what they should be.

As I said in my last book ‘Can we avoid another financial crisis?’ QE was like Faust’s pact with the Devil: once you signed the contract, you could never get out of it. They’ll turn on their infinite money printing machine, buy bonds off financial institutions once more, and give them liquidity to pour back into the markets, pushing them once more to levels that they should never rightly have reached.

This, of course, will help to make the rich richer and the poor poorer by further increasing inequality. Which is arguably the biggest social problem of the modern era. So, as well as being incompetent economists these mainstreamers are today’s Marie Antoinette. Let them eat cake, indeed.

The information in this newsletter is for informational purposes only. The information contained in these quotes is believed to be from reliable sources. AIDC Advantage Corp. “the company” cannot be held liable for any misrepresentations on behalf of the sources we use. The company is not an investment advisor nor are they licensed to give investment advice. The company assumes that all buyers acquire colored diamonds for collectible and jewelry purposes as well as the long-term potential of the market. It is advised to contact a qualified advisor before entering into the colored diamond market. The company cannot guarantee that past performance of colored diamonds will continue in the future and that a colored diamond purchased from the company will provide a net gain. They are not as liquid as some collectibles. They are not necessarily appropriate for every individual. The quotes used only represent part of the article. For full viewing of any article, please contact your advisor. For more information, please refer to the terms & conditions in the AIDC Advantage website.